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What the non-tax lawyer should know about tax procedure.
Jeffrey B. Kahn, Esq. - Board Certified Tax Lawyer
Law Offices of Jeffrey B. Kahn, P.C.
Walnut Creek - San Francisco - San Jose - Los Angeles - San Diego - Orange County
E. How Agents Gather Information
1. During the examination, the agent may request various types of documentation to verify items of income and expense on the return, including records, such as receipts, invoices, books, and worksheets. Revenue agents may also review prior or subsequent tax returns or the returns of related taxpayers.
2. Generally, agents have broad powers to compel production of relevant information. Nevertheless, certain types of information may be subject to privilege is likely to have been waived. For example, an agent may ask to see invoices to substantiate a deduction claimed for professional services, such as accounting or legal fees. The descriptions of the services provided could contain information leading to another adjustment. If the descriptions of the services may be privileged, the taxpayer may be able to withhold the actual invoices in favor of some other proof of payment, or may be able to provide redacted invoices.
3. If the taxpayer fails to produce requested items, the Service can summons a taxpayer or third party for books, records or testimony. When an administrative summons is issued, the summoned person must personally appear at the time and place specified with any requested items. The summoned person has the right to counsel, the right to assert the attorney-client privilege, and the right to raise the self-incrimination privilege under the 5th Amendment. The IRS can issue administrative summons to third parties believed to hold relevant information. Notice of summons issued to a third party must be given to the taxpayer within 3 days of the date on which service is made to the third party and no less than 23 days before the summons return date. This is to allow the taxpayer sufficient time to file a petition to quash.
4. If a summoned party ignores the summons or otherwise fails to fully comply, the Service may bring legal proceedings to enforce the summons in federal district court. A court will generally enforce a summons if there is a legitimate purpose for the examination; the information demanded may be relevant to that purpose; the information is not already in the possession of the Service; the information or document is not privileged and the Service has complied with the applicable administrative requirements of the Code and regulations.
F. Dealing with a Potential Criminal Referral
1. If an agent has a “firm indication of fraud” he or she is required to suspend the civil examination without disclosing the reason to the taxpayer. IRS regulations prohibit an agent from developing a criminal case against a taxpayer under the guise of a civil investigation. Then the agent must refer the case to the Criminal Investigation Division. The agent may be aware of potential fraud before he has enough evidence to suspend the exam and turn over the case.
2. Among the tell-tale signs that a civil case may be heading toward a criminal referral is the sudden cessation of communication with you by the agent; the agent asks the client “state of mind” questions – usually starting with words like “why” and “didn’t you know?” or the agent issues for periods other than those contained in the original examination notice.
3. Most importantly, look for the appearance of a “special agent”. A special agent is a federal law enforcement officer. He or she is required to identify himself as such and to give a Miranda-type warning. A special agent may arrive with the revenue agent or alone. Note that a special agent may make an unannounced visit to the taxpayer. The sole purpose of any such meeting is to catch the taxpayer off guard and without counsel, so that the client can incriminate himself. Because it is human nature to try to explain things, a taxpayer should be advised never to speak to a special agent without counsel present.
4. If an examination becomes a criminal investigation, or if you think that the examining agent is heading in that direction, consider the following: terminating all direct contact between the taxpayer and the IRS; obtaining taxpayer records from third parties and holding them; advising the taxpayer to refrain from witness tampering and document creation or alteration. Cooperation with the revenue agent will not save the day. If there is evidence of criminal conduct and that evidence is enough to obtain a conviction, there will be a referral, irrespective of how a taxpayer cooperates.
G. Dispositions of Audits
1. No-change Result. If the taxpayer presents sufficient documentation for the items at issue, the examining agent may accept the return as it was filed.
2. Agreed Result. If the taxpayer and the examining agent reach an agreement on adjustments, the taxpayer and examining agent complete a form describing the adjustments to the return and agreeing that any additional tax may be assessed.
3. Unagreed Result. Where the taxpayer and the examining agent cannot reach an agreement, the examining agent’s next step will depend upon whether there is sufficient time remaining on the statute of limitations on assessment (generally six months). If there is sufficient time left on the statute of limitations, the examining agent’s manager. Once approved, the report is sent to the taxpayer along with a “30-day letter”. If there is not sufficient time left on the statute of limitations and the taxpayer will not agree to extend the statute, the report will be sent to the taxpayer with a statutory notice of deficiency (sometimes referred to as a 90-day letter”).
4. A 30 day letter gives the taxpayer an opportunity to protest the examining agent’s proposed adjustments to an administrative appeals officer. The taxpayer has 30 days within which to submit a written protest outlining the taxpayer’s position on fact and law. Appeals officers are charged with evaluating the case ex parte based upon the record created by the revenue agent and as supplemented by the taxpayer. The appeals officer can uphold the examining agent; find for the taxpayer or attempt to reach a settlement with the taxpayer or attempt to reach a settlement with the taxpayer. The agent; find for the taxpayer or attempt to reach a settlement with the taxpayer. The appeals officer is instructed to consider the “hazards of litigation” for both sides in his or her evaluation of the case. If the case is agreed at this level, the parties will sign an agreement permitting the Service to assess and collect the agreed amounts. If the parties can not reach an agreement or if the taxpayer does not respond to the 30-day letter, the appeals officer will issue a statutory notice of defiency.
5. The service must issue a statutory notice of deficiency before the assesses additional tax. The Notice gives the taxpayer one last chance to contest with the Tax Court to redetermine the deficiency. If the taxpayer does not respond to the 90-day letter. At this point, the taxpayer must pay the amount assessed. The taxpayer then has the opportunity to contest the assessment by filing a refund claim. If the refund claim is disallowed, the taxpayer may then file a refund suit in United States District Court or United States Court of Claims.
H . Statute of Limitations
- As a general rule, the service may not assess a tax more than 3 years after the later of the date the return of the date the return was actually filed.
- A special rule applies if the taxpayer omitted from his or her return an amount of gross income that is greater than 25% of the amount of gross income that was included on the return. In such cases, the statute of limitations for assessment is 6 years.
- In the case of a false or fraudulent return with intent to evade tax the tax may be assessed at any time. Also, when no return was filed, the tax may be assessed at any time.
- A taxpayer may agree to extend the statute of limitations. The decision to extend the statute of limitations must be made carefully. Under certain circumstances, giving consent to extend the statute may benefit the taxpayer. For example, in an unagreed case, consent may be given so that the case can be considered by the appeals division. In other cases, extending a statute may simply provide the agent with additional time to identify and develop additional adjustments.